EU COMPETITION IN INNOVATION - A notion similar to innovation competition has been
adopted in the EU under the name ‘competition in innovation’ in the 2011 Guidelines on the Applicability of Article 101 TFEU to Horizontal Co-operation Agreements (EU Horizontal Guidelines). The European Commission acknowledges that competition in innovation in the context of R&D co-operation in some cases cannot be sufficiently assessed by analysing actual or potential competition in existing product or technology markets.434 However, in
431 United States Department of Justice and Federal Trade Commission, ‘Antitrust Guidelines
for the Licensing of Intellectual Property’, 6 April 1995, par. 3.2.3. The introduction of the innovation market in the Intellectual Property Guidelines led to criticism from scholars, in particular G.A.HAY, "Innovations in Antitrust Enforcement", Antitrust Law Journal 1995, vol. 64, no. 1, (7); R.J.HOERNER, "Innovation Markets: New Wine in Old Bottles?", Antitrust Law Journal 1995, vol. 64, no. 1, (49); and R.T.RAPP, "The
Misapplication of the Innovation Market Approach to Merger Analysis", Antitrust Law Journal 1995, vol. 64, no. 1, (19). For a description of the criticism that they expressed, see J.DREXL, "Anticompetitive Stumbling Stones on the Way to a Cleaner World: Protecting Competition in Innovation Without a Market", Journal of
Competition Law and Economics 2012, vol. 8, no. 3, (507), p. 517-518.
432 United States Department of Justice and Federal Trade Commission, ‘Horizontal Merger Guidelines’, 19 August 2010, par. 6.4.
433 United States v. General Motors Corp., Civ. No. 93-530 (D.Del. filed Nov. 16, 1993). For a more elaborate description of this case and other US cases that dealt with innovation competition, see B.R.KERN, "Innovation Markets, Future Markets, or Potential Competition: How Should Competition Authorities Account for
Innovation Competition in Merger Reviews?", World Competition 2014, vol. 37, no. 2, (173), p. 184-190. 434 Communication from the Commission - Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (EU Horizontal Guidelines) [2011] OJ C11/1, par. 119. In the previous version of the EU Horizontal Guidelines, reference was made to ‘innovation
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industries in which the innovation process is not clearly structured so as to allow the identification of R&D poles, the Commission sees no other option than to rely on these existing markets.435 In industries in which the innovative efforts are structured in such a way that it is possible to identify competing R&D poles at an early stage, such as the
pharmaceutical sector where new products have to go through regulatory approval
procedures, the Commission suggests to analyse whether a sufficient number of R&D poles will remain after the agreement takes effect. The following approach is proposed by the Commission: ‘The starting point of the analysis is the R&D of the parties. Then credible
competing R&D poles have to be identified. In order to assess the credibility of competing poles, the following aspects have to be taken into account: the nature, scope and size of any other R&D efforts, their access to financial and human resources, know-how/patents, or other specialised assets as well as their timing and their capability to exploit possible results. An R&D pole is not a credible competitor if it cannot be regarded as a close substitute for the parties’ R&D effort from the viewpoint of, for instance, access to resources or timing’.436 The framework enables competition authorities to take into account incentives for disruptive innovation, since it does not merely rely on competition in existing markets.437
R&D INVESTMENT AS BASIS FOR MARKET DEFINITION -Following the approach introduced in
the area of Article 101 TFEU in the EU Horizontal Guidelines, the European Commission could look at R&D investments in the other branches of competition law to assess
competition in innovation beyond existing relevant product markets. In situations in which it is possible to identify competing R&D poles that are aimed at developing substitutable products or technology, the Commission suggests in the Guidelines on Horizontal Co-
operation Agreements to analyse whether after the relevant co-operation agreement there will be a sufficient number of remaining R&D poles.438 A similar approach could be applied to market definition in merger and abuse of dominance cases in the online environment where market players do not merely compete by lowering prices and improving products in existing markets but also by introducing new products which shift demand and create a new market of their own. In this context, R&D investment can be seen as input to new products and
technologies. Instead of relying on a pure product market definition, upstream markets for R&D expenditure could be defined.439 However, as the Commission argues in the EU
markets’ instead of ‘competition in innovation’. However, the Commission did not define the term innovation market. See Commission Notice - Guidelines on the applicability of Article 81 of the EC Treaty to horizontal cooperation agreements [2001] OJ C3/02, par. 60.
435 Communication from the Commission - Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (EU Horizontal Guidelines) [2011] OJ C11/1, par. 122.
436 Communication from the Commission - Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (EU Horizontal Guidelines) [2011] OJ C11/1, par. 120.
437 See also J.D
REXL, "Anticompetitive Stumbling Stones on the Way to a Cleaner World: Protecting
Competition in Innovation Without a Market", Journal of Competition Law and Economics 2012, vol. 8, no. 3, (507), p. 520-522.
438
Communication from the Commission - Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (EU Horizontal Guidelines) [2011] OJ C11/1, par. 119-120.
439 See also M.L.K
ATZ AND H.A.SHELANSKI, "'Schumpeterian' Competition and Antitrust Policy in High-Tech Markets", Competition 2005, vol. 14, (47), p. 50.
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Horizontal Guidelines this method only works if it is possible to identify R&D efforts at an early stage. In the ICT sector, companies often do not disclose this type of information as a result of which it becomes hard to apply this approach. In addition, it is impossible to know which R&D investments will effectively lead to new products in future markets.440
SPECIALISED ASSETS - Nevertheless, even in case the precise R&D efforts are unobservable it could still be possible to identify the assets to which potential competitors need access in order to compete with the incumbent. The US 1995 Antitrust Guidelines for the Licensing of Intellectual Property already referred to such resources as ‘specialised assets’.441
The notion was also incorporated in the EU Horizontal Guidelines which mentions know-how and patents as examples.442 The application of the notion of specialised assets would make the definition of the relevant market dependent on the capabilities and resources that are necessary for a firm to have in order to innovate. The proposed acquisition of Northrop Grumman by Lockheed Martin in 1998 in the US illustrates this. In the case, the DoJ defined a market for the ‘development, production and sale of high performance fixed-wing military
aircraft for the U.S. military’ while it could not observe on what particular innovations the
companies were working. In this context, the DoJ stated: ‘Northrop, Lockheed, and Boeing do
all pursue new ideas and designs for future high performance fixed-wing military aircraft to meet specific combat needs, and these firms are the only companies that have the capabilities to compete for combined electronics system integration and military airframe upgrades’.443
BROAD MARKET - Although R&D investments and specialised assets such as patents and know-how may be imperfect proxies of the level of innovation in an industry,444 the type of R&D and assets in which investments are made can give an indication of the direction in which innovation will develop and could form a starting point for defining a relevant market that is more favourable to innovation as compared to a strict product market definition. As more hints become available on what will constitute the technology of the future, it will be easier to identify the required inputs and thus the relevant market for innovation. In order to make market definition more conducive to disruptive innovation, a very wide relevant market should be defined as long as it is not clear which products or technologies will dominate in the future. An example of such a broad relevant market for internet services would be a market for attention. This market definition is favourable to disruptive innovation, since it does not rely on the specific service that is offered to internet users. Instead, a market for attention implies that all businesses that attract consumers to their websites or mobile applications compete for the limited time that users spend online irrespective of the specific
440 J.G.S
IDAK AND D.J.TEECE, "Dynamic Competition in Antitrust Law", Journal of Competition Law and
Economics 2009, vol. 5, no. 4, (581), p. 612-614.
441
US Department of Justice and Federal Trade Commission, ‘Antitrust Guidelines for the Licensing of Intellectual Property’, 6 April 1995, par. 3.2.3.
442 Communication from the Commission - Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (EU Horizontal Guidelines) [2011] OJ C11/1, par. 120.
443
United States v. Lockheed Martin Corp., Civ. No. 98-00731 (D.D.C. filed Mar. 23, 1998). See further, B.R. KERN, "Innovation Markets, Future Markets, or Potential Competition: How Should Competition Authorities Account for Innovation Competition in Merger Reviews?", World Competition 2014, vol. 37, no. 2, (173), p. 185-186.
444
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functionalities of the products and services that are offered.445 An alternative market
definition for online platforms that does not take the specific service or functionality offered to users and advertisers as object but is based on the input needed to deliver those services would be a market for the data used to tailor the services to the specific needs of users and advertisers. As discussed above,446 such a relevant market for user data cannot be defined under current standards for market definition unless the data is sold as a separate product to third parties. However, most players like Google and Facebook do not trade user data to third parties but use the collected information as an input for the provision of relevant
functionalities to users and targeted advertising services to advertisers.
ADDITIONAL RELEVANT MARKET FOR DATA -It is submitted that the definition of an additional relevant market for user data is still appropriate in such circumstances even though, strictly speaking, there is no supply and demand for data. By regarding data as a specialised asset in analogy to the EU Horizontal Guidelines, a hypothetical or potential market for data can be defined in addition to the actual relevant markets for the services provided to users and advertisers. This will enable competition authorities and courts to take a form of potential competition into consideration whereby online platform providers do not only compete in the product markets for the specific services offered to users and advertisers but also in a broader market for data that can be deployed for improving the quality and relevance of these
services.447 In addition, a more forward-looking stance towards market definition can be taken in this way which goes beyond analysing current usages of data in narrowly-drawn relevant markets for products and services.448 Critics may argue that the number of markets to be examined would be endless if relevant markets were to be defined around internally generated and used inputs to other products, as is the case with the data-dependent services provided to users and advertisers by online platforms.449 One should note, however, that data is more than just a form of input for the services delivered to users and advertisers on online platforms. By collecting data and monitoring the behaviour of users, internet players can also detect changes in interests which enables them to adapt to consumer preferences by introducing new services following potential trends.450 The latter role of data collection and analysis in the development of new services is not considered when only relying on relevant markets for current products or services. It is argued that this peculiarity of data justifies and even demands a deviation from existing competition law standards. By defining and investigating a potential market for data in addition to the relevant markets for the services currently offered by a particular
445 D.S.E
VANS, "Attention Rivalry Among Online Platforms", Journal of Competition Law and Economics 2013, vol. 9, no. 2, (313).
446 See section 4.2.1 above. 447 In a similar vein, P.J.H
ARBOUR AND T.I.KOSLOV, "Section 2 In A Web 2.0 World: An Expanded Vision of Relevant Product Markets", Antitrust Law Journal 2010, vol. 76, no. 3, (769), p. 773 argue that a data market definition would better reflect reality in which internet companies often derive value from data far beyond the initial purposes for which the data has been collected in the first place.
448 P.J.H
ARBOUR AND T.I.KOSLOV, "Section 2 In A Web 2.0 World: An Expanded Vision of Relevant Product Markets", Antitrust Law Journal 2010, vol. 76, no. 3, (769), p. 784.
449
D.S.TUCKER AND H.B.WELLFORD, "Big Mistakes Regarding Big Data", The Antitrust Source 2014, vol. 14, no. 2, (1), p. 4-5 arguing that personal data cannot constitute a relevant product market unless it is sold to customers.
450 M
ONOPOLKOMMISSION, ‘Competition policy: The challenge of digital markets’, Special report No. 68, July
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provider, competition analysis will better reflect the competitive reality of the environment in which online platforms operate.451 In addition, it also becomes possible to analyse the
competitive constraints applicable to the asset to which potential competitors of incumbent providers need access in order to compete in future product markets.452
LIMITATIONS IMPOSED BY THE COMMISSION NOTICE ON MARKET DEFINITION -However, the Commission notice on market definition seems to stand in the way of applying an approach that would take account of the role potential competition in online markets. Although the EU Horizontal Guidelines recognise that in some cases the level of competition cannot be
sufficiently assessed by relying on existing markets, the Commission notice on market definition states that competitive constraints arising from potential competition should not be taken into account in the market definition on the ground that such constraints are generally less immediate. According to the Commission notice, these constraints can only be assessed in later stages of the competition assessment.453 By focusing on business models instead of end products and services as a starting point for the competition analysis, it could be assessed how a company makes profits and which other market players are able to put pressure on that profit stream. In this way, market definition would be better able to capture the dynamic nature of fast-moving industries.454 Even though such a more forward-looking approach to market definition would be desirable to make competition enforcement more conducive to disruptive innovation, it thus remains to be seen whether competition authorities and courts are willing to move away from strict product market definitions as required by the
Commission notice in merger and abuse of dominance cases.
CURRENT APPROACH OF THE EUROPEAN COMMISSION - In competition cases in the ICT sector,
the European Commission still focuses on preserving sustaining innovation within existing markets. At the same time, disruptive innovation seems to have played a very important role in solving the competition concerns. In Microsoft,455 the European Commission intervened in the market for PC operating systems. Although the Commission tried to preserve sustaining innovation in this market by forcing Microsoft to give competitors access to its technology, it seems that the competition concerns were rather solved by disruptive innovation coming from Google and others who brought the internet to the forefront diminishing the significance of Microsoft’s dominant position in the market for PC operating systems. In the Google
investigation, the Commission still appears to concentrate on preserving sustaining innovation
451
For an analysis of the added-value of the definition of an additional relevant market for data in merger cases, see section 10.4.1 below.
452 See also the analysis in I.G
RAEF, "Market Definition and Market Power in Data: The Case of Online Platforms", World Competition 2015, vol. 38, no. 4, (473), p. 494-495.
453 Commission Notice on the definition of relevant market for the purposes of Community competition law [1997] OJ C 372/5, par. 14 and 24. See also C.AHLBORN,D.S.EVANS AND A.J.PADILLA, "Competition policy in the new economy: is European competition law up to the challenge?", European Competition Law Review 2001, vol. 22, no. 5, (156), p. 161-162.
454
STUDY FOR THE ECONCOMMITTEE OF THE EUROPEAN PARLIAMENT, ‘Challenges for Competition Policy in a
Digitalised Economy’, July 2015, p. 51 and 70-71, available at
http://www.europarl.europa.eu/RegData/etudes/STUD/2015/542235/IPOL_STU(2015)542235_EN.pdf. 455 Case COMP/C-3/37.792 - Microsoft, 24 March 2004 and Judgment in Microsoft v. Commission, T-201/04, ECLI:EU:T:2007:289.
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in the market for search engines,456 while disruptive innovation coming from other internet platforms such as social networks and mobile applications may reduce the relevance of Google’s position in this market. As a result, even though the existing competition tools can be adapted to make market definition more conducive to disruptive innovation, it is
questionable that the Commission will take a different approach in the future.